In an article first published by Thomson Reuters, Managing Associate, Annabel Mackay considers the issues employers need to consider when embarking on redundancy exercises and the costs of getting it wrong.

In the last month, a number of financial services employers have announced large-scale downsizing exercises in different parts of their businesses. These redundancies come on the back of extensive restructuring in the financial services sector as a whole.

The Financial Times reported that the cuts which took place in 2015 amounted to 10 percent of the total workforce across the 11 large European and U.S. banks that announced redundancies. Employers must have a good understanding of the collective consultation regime or budget for the cost of failing to discharge those obligations.

Collective consultation

The scale of redundancies taking place in the financial services sector means that collective consultation obligations are likely to be triggered. The duty to consult with "appropriate representatives" of affected employees arises where the employer is proposing to dismiss 20 or more employees at one establishment within a 90-day period.

Where collective consultation applies, dismissals must not take effect before minimum time periods have elapsed and there is a prescribed information and consultation process. The employer is also subject to a duty to notify the secretary of state of the proposed dismissals via the form HR1, a copy of which must also be given to the representatives.

There are a number of factors to consider when determining whether collective consultation obligations are triggered. Firstly, there is the question of what is meant by a proposal to dismiss given that the relevant European Directive refers to redundancies being contemplated.

An Employment Appeal Tribunal decided that the term proposal meant that there was a clear, albeit provisional, intention to make redundancies. The most important point for employers to remember, however, is that the decision to make redundancies must not have been finalised.

In order to guard against a breach of the collective consultation regulations, employers should ensure that any documents circulating prior to the start of the process are expressly marked as being subject to consultation. It is important to keep control of internal communications on this subject as excel spreadsheets with numbers and names of "at risk" employees can be very damaging to the defence of any collective consultation claim.

Secondly, multi-site employers must decide how they will approach the "establishment" element of the test for the purposes of calculating the numbers. Following a controversial decision by the Employment Appeal Tribunal in 2013, there had been some uncertainty about the meaning of the term establishment.

The "Woolworths decision" had required employers to aggregate dismissals across the whole of their business when deciding whether collective consultation obligations had been triggered. The case was referred by the Court of Appeal to the European Court of Justice who concluded that there was no requirement to aggregate dismissals in this way.

When deciding whether there are sufficient numbers of dismissals at one establishment to trigger collective consultation, employers need to consider the local unit to which the employees are assigned to carry out their duties. The old case law on establishments remains relevant. An establishment does not need its own legal, economic, financial, administrative and technological resources. Nor does the establishment need to have its own management to independently effect collective redundancies.

It must however have a degree of permanence and stability and the necessary workforce and other resources to carry out the tasks that have been assigned to it. Whatever approach the employer decides to adopt in relation to the question of the establishment, it is important to ensure that it is aligned with internal and external communications on that subject.

The final factor to consider when deciding whether collective consultation obligations are triggered is what type of dismissals are caught. These are not just redundancies in the conventional sense, but dismissals which are not related to the individual concerned.

Employers often forget that changes to terms and dismissals with immediate re-engagement still count as dismissals for that purpose. Where volunteers are invited to take redundancy, they should still be included in the overall numbers where compulsory dismissals will take place if insufficient volunteers are identified.

Once collective consultation obligations are triggered, the employer must ensure that consultation begins in "good time" and within the minimum time-period before the first dismissal takes effect (either 30 or 45 days depending on the numbers). Although the employer is not required to consult for the full 30 or 45 days, the consultation process must have concluded before notices of dismissal (to take effect at the end of the minimum period) are issued.

In practice, many employers will consult for the full 30 or 45 days in order to guard against complaints by employee representatives that the consultation process has not completed or was not sufficiently meaningful.

The minimum time periods are also important because they govern the amount of notification that must be given to the secretary of state via the form HR1. Failure to comply with the requirement to file the form HR1 gives rise to the possibility of a fine which is now unlimited.

In late 2015 we also saw the first prosecutions brought against the directors of City Link for failure to comply with the collective consultation obligations. The City Link directors were acquitted but the prosecutions signal a tougher approach to that element of the collective consultation regime.

Appropriate representatives must be provided with prescribed information about the proposals in order to enable meaningful consultation to take place. The consultation process itself must cover consultation on ways of avoiding the dismissals, reducing the numbers of dismissals and mitigating the consequences of any dismissals.

It is insufficient for the employer to invite views from the representatives without giving them due consideration. Consultation must take place with a view to reaching agreement. This requirement amounts to an obligation to negotiate under European case law. The adequacy of the consultation process will also be relevant to the procedural fairness of the dismissals from an unfair dismissal perspective.

Individual consultation

Where collective consultation obligations apply, they do not obviate the need for individual consultation. Financial services firms may satisfy their collective consultation obligations and still face claims from individual employees arising from the procedure adopted for individual consultation.

The fact that an employer has consulted with representatives regarding the reasons for dismissal, the chosen selection criteria and means of avoiding the dismissals does not mean that an employer can dispense with individual consultation meetings. The individual must understand and have an opportunity to challenge how the selection criteria have been applied to them and to explore whether there are any alternatives to redundancy.

There is often pressure to short-cut these requirements and to send the employee home once their "at risk" status is communicated. The business must understand that Tribunals expect these minimum standards of fairness to be followed.

Even a small employer is not exempt from the requirement to carry out individual consultation and large employers are subject to particular scrutiny. The procedural fairness of any dismissal is assessed against the size and administrative resources of the employer.

The cost of getting this wrong can be significant. Protective awards for failure to inform and consult collectively are punitive and the starting point remains 90 days' actual pay per affected employee. Unfair dismissal awards are compensatory, reflecting actual losses rather than the extent of an employer's non-compliance with procedural safeguards.

Financial services employees can hit the statutory cap fairly quickly when the full extent of their remuneration package is taken into account and the likelihood of securing a new role diminishes as each week brings a new announcement of further cuts in the sector.

It makes financial sense for the business to listen to the recommendations of their HR departments when carrying out these downsizing exercises. With reduced opportunities and lower severance packages on offer, employees are increasingly willing to challenge their employers, whether via an internal appeal or in the tribunal (where the fee regime does not deter high-earners).